As we noted in yesterday’s Fed Preview, there wasn’t much changed from the November statement, other than to say that the Fed was leaving rates unchanged this month at 1.50% to 1.75%. Last month was the final cut in the mid cycle adjustment, and as promised, Fed Chairman Powell and the Committee left rates on hold. However, this time the decision was unanimous. In addition, the Fed sees no change in rates through 2020 according the Fed’s dot plot forecast. As of the time of this writing, according to the CME FedWatch Tool, the market is pricing in a 93% chance of the Fed leaving rates unchanged at the January 29th meeting.
Source: City Index
But there were some fireworks in the press conference Q&A afterwards. When asked about year-end funding in the repo markets, Jerome Powell said that the Fed was open to purchasing coupons, not just Treasury bills. As a result, the US Dollar began falling, and bonds and stocks went bid. The reason for these moves is that, as the market has been suspecting, this is more “Not QE”. (Remember “Not QE” is a term Powell used as the Fed was providing liquidity to overnight repo markets, which is essentially QE)
Source: Tradingview, City Index
Although there was little fanfare in the FOMC statement itself, the Q&A was much more interesting. It will be important to watch over the next few weeks how the Fed responds to the possibility of a liquidity crunch into the end of the year. The main question will be: Does the Fed have to provide more “Not QE” into year end?
From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.